What’s On Deck? Retail Development

Retail development has been and will remain scarce, though redevelopment of existing retail space will continue to evolve.

The retail sector has taken a beating over the past few years, leading to a 13 percent vacancy rate in 2010, according to George Ratiu, an economist at the National Association of REALTORS®. Consumers are only now beginning to cautiously pry open their wallets and purchase not only what they need — but what they want.

Still, what was once normal in retail development is a thing of the past. “We’ll see big changes in retail development in the next five years,” says Edward Shriver, AIA, a 30-year retail veteran and principal with Strada, a Pittsburgh-based architecture and urban design firm. “Because of the great recession, we’re losing retailers, and the whole economy has to make changes in how retail is done in terms of who’s doing what and where.”

Women, Government, “Zoomers” to Drive Retail

Change in retail is starting with the transformation of malls. “We’ve overdeveloped our retail in this country, so there’s been very little development,” says Midge McCauley, a principal at Seattle-based Downtown Works, which performs market research, retail merchandise mix strategies, and plans for street-oriented retail in urban and neighborhood centers. “Instead of new construction starts, you’re seeing the remalling of America, which is the redevelopment of existing properties. It goes a step beyond renovating. Some malls have run their economic lifespan and now have to reinvent themselves. The land is worth so much more than when it was purchased that it’s worth it for the owners.”

Enclosed malls are passé, and owners of less-successful malls are turning their properties into lifestyle centers. “They’re open-air centers with upscale tenants that generally have more amenities than strip centers, which in my opinion means some trees and plantings. Developers have been trying to recreate what has occurred naturally in tow and many have been called town centers because they’re really faux town centers.”

The future will be dominated by retail nested in those natural or synthetic towns. “There’s a major shift for people to want to live, work, go to school and play right in urban centers,” says Max Reim, co-managing partner and founding principal LiveWorkLearnPlay, a consulting and development group in Montreal. “Within urban centers, the most vibrant of all are urban villages. Think of the series of urban villages that make up New York City. The same is true of cities like Paris, London and Chicago. We’re seeing that happening in much smaller, mid-sized cities, where small neighborhoods are integrated with each other and create a much healthier ecosystem.”

What’s driving the shift toward urban villages? Young women — whom Reim says represent 63 percent of the college population in North America — are taking on more decision making and want to shop in urban villages. “Cities, towns and states,” adds Reim, “are developing and enticing businesses, colleges, health care facilities, and much, much more to their downtown cores, which brings in people 24/7/365.”

And because of their massive numbers, “zoomers”— or 45-and-older “boomers with zip,” as Reim describes them — are also propelling the growth of villages. “This is an essential mass of demographic that’s seeking to live, work and recreate in mixed-use and urban villages,” he says.

The opportunity for socializing is at the heart of mixed-use and urban villages. They’ll retain fundamental concepts like the great coffee shop and bakery, along with the great inn, pub or hotel, says Reim. They’ll also include unique local retailers and mom-and-pop restaurants that can be found only in that village.

If You Involve Them, They Will Come

Developers will supplement new urban villages with entertainment and activity-based retail. Entertainment activities have been growing in malls, but retail centers have only recently begun to include activity-based retail. “Very few leasing and planning companies or developers even think about how you get people to use your centers on a daily basis and stay much longer,” says Reim. “Today the most successful retail centers are those that encourage people to spend more time and visit with more frequency. Whether they spend no money or as much as possible, people beget people.”

Reim says developers should be programming at least 20 to 40 percent of experiential retail concepts into their centers. “Those include fitness centers and yoga studios, health-care centers for things like physiotherapy, and much, much more so it’s not just about selling something but about things to do,” he explains. “A running club might be affiliated with a local running shop, or a bicycle club might start with the retail bike shop so that every Saturday morning you’re meeting friends for breakfast after a bike ride. You’re then creating a center that becomes part of people’s lives, and they start using the retail on a daily basis.”

Bill Morris, a principal at the retail acquisition firm Morris Capital Partners in Fort Worth, Texas, says retail is mirroring the trend of “placemaking” in residential development. “Malls have to offer something different than they did 30 years ago,” he says. “They have to be a ‘place’ for the whole family, not just for teenagers. That can be accomplished by adding restaurants, entertainment, grocery stores and discounters. Malls will also have more appealing amenities, such as open-air components, outdoor seating areas, water features, soft-seating areas, and, other ‘placemaking’ ideas.”

Morris says malls that are out-positioned by a nearby lifestyle center, that lose their anchors, or that don’t reinvest and reinvent themselves will fail. “However, malls aren’t dinosaurs, and well-located fortress malls will continue to thrive well into the future,” he says. “If every other mall in the country goes dead, malls like NorthPark Center and Galleria Mall in Dallas will continue to thrive because they’re well insulated from future competition. The area’s demographics have continued to get better, and there’s a limited amount of land on which to build. Even if you could get land, developing a competing mall wouldn’t make economic sense because replacement costs are high, and the rents wouldn’t justify it.”

The future will also bring more retail space being repurposed to nontraditional retail. “It’s not quite retail but kind of retailing,” says Shriver. “A MedFirst medical center makes perfect sense in a grocery-anchored strip or small-town main street space where there’s a pharmacy or grocery store because there’s some synergy. The silver lining in the recession is that it’s forced people to try things they wouldn’t have tried before. Some of them are going to pan out well.”

Leases: Shorter and for Smaller Spaces

The trend in leasing is to downsize. “What we’ve observed in the last year and a half is the emergence of small retail space,” says Ratiu. “For example, some former Circuit City stores have been partitioned into smaller retail spaces, and even traditional malls have shifted to leases that can be much shorter than a year, particularly during the holidays. With the emergence of popup stores, there have been leases shorter than a day. It’s not uncommon — at least in New York City — for apparel merchandisers to use Facebook and Twitter to broadcast an ‘event’ and have a one-day sale.”

The popup store concept will continue to grow. “They reside in two categories, and both are about bringing the brand to the consumer in an unusual place that’s totally unexpected,” says Jim Polowy, vice president of retail environmental design at TPN, a Chicago-based retail marketing agency. “One is more demonstration: ‘Here’s our product line, and we’ll demonstrate it to create brand affinity, but not sell it in this space.’ Because it’s a surprise, it’ll be in a high-traffic urban area that draws the product’s demographic.”

The second type of popup will sell products. “Target set up in the same Michigan Avenue spot for only two weeks,” explains Polowy. “It sold unique products that could be impulse buys for people walking around during lunch. It kept everything at a reasonable price reference— I think there was nothing over $50 — and all you could see were red Target bags, which was very telegraphic on Michigan Avenue.”

Leasing brokers will also reduce the number of leases that involve co-tenancy. “You’d get a major tenant like Gap, and its leasing specialists would say, ‘We’re interested, but we won’t come unless you also have this and that tenant; if you don’t have them, we can break our lease,’” explains Shriver. “Retailers like it because it drives the kind of customer they’re looking for to that market. The problem is that co-tenancy requirements really constrain developers. Your whole leasing strategy can unravel very quickly, especially if your center turns out to be less than A-plus quality, the retailers aren’t doing as well as they expected, and now there’s an opportunity for tenants to get out.”

Overall, brokers will be forced to become much more selective. “The traditional leasing process is completely irrelevant, unintelligent and mediocre,” says Reim. “Brokers give incentives to large companies that don’t need them. They also put up a ‘for lease’ sign and sign whoever comes in without caring about the quality of the operator or the use. The end losers are the developers and people who live in the neighborhood.”

Instead, the best brokers will target the best tenants. “We have some of the best restauranteurs, retailers and entertainment operators working to find the best-of-the-best operators for each use,” he says. “The whole process starts with a creative and logical vision of what the neighborhood should be. You get one or two anchors to reinforce that vision, and then the secondary uses also will have a dramatic effect on the success of retail and whether your end users will spend time and money at your development.”